No one was impressed with the European Central Bank’s decision to do… well… nothing (here’s the statement).
Although that’s probably the right move at this juncture given they’re monetizing everything that isn’t tied down (except stocks, for now). In fact, CNBC basically threw in the towel on Draghi to cut away to a shot of Hillary Clinton’s jet from which the Democratic nominee will presumably emerge in short order to give a press conference about who knows what.
Meanwhile, the desk commentary on Draghi is rather dour, Here’s Citi’s take:
“Reporters are trying to press Draghi for more about prospects of further action. His main points of emphasis include:
No action is warranted now given economic developments, yet the ECB recognizes risks (mostly external) that may present itself.
Inflation remains key to the outlook and further ECB action. If inflation expectations remain low, the ECB will extend the AP program. In the meantime, it is exploring options in recognition of inflation risks amid low interest rates, which have restricted the QE asset universe. Emphasize, exploring, as for future conversation.
Draghi says there’s a big question trying to be answered regarding inflation expectations. Non market based expectations are stable – 1.2% for 2017 and 1.5% for 2018. However, market based measures of inflation are trending down; most markedly after Brexit but even before. This market based trend is hard to explain. It looks to be part the result of market dislocations in the bond market buy beyond that, Draghi says it’s very hard to explain.
He adds that oil is another complicating factor but says the probability of deflation has not increased.
The ECB still has the “will, capacity, and ability” to act.
EURUSD is nearly back to where it started. Now testing 1.1305. Press conference highs come in towards 1.1325, while the lows are near 1.1275.”
And a golf clap for Deutsche Bank for being virtually the only desk to get this right ahead of time (from September 2):
“We had thought the ECB would err on the side of caution in September and ease policy again, specifically by extending QE by 9-12 months. Recent events have caused us to change this view. We now believe the ECB will leave policy unchanged on 8 September and wait until December before announcing the QE extension.”
“The ECB has a basis to wait-and-see in September. Brexit has not been much of a shock. Fed hawkishness could be just what the ECB wanted. Moreover, the credit impulse is holding up and the last Bank Lending Survey showed no deterioration. The ECB is increasingly aware of the vulnerability of market perceptions of bank profitability and how this might impair the policy transmission mechanism. The ECB would like to monitor the situation.”
“We expect the tone to remain dovish. The macro environment remains very uncertain and the ECB does not want markets to believe that stalling in September necessarily means that tightening is more likely than further loosening. To preclude an unwarranted tightening of financial conditions,expect the ECB to stress its readiness to act if necessary and with all available instruments.”
Nailed it. Congrats Deutsche.
As for the market, the DAX wasn’t happy: